Insurance Law – The consequences of non-fulfilment of a condition precedent contained in an insurance policy: a recent decision

In Screening and Earthworks (Pty) Ltd v Hollard Insurance Company Limited the South Gauteng High Court recently considered whether a ‘condition precedent’ in an insurance policy placed a positive contractual obligation on an insured. The judgement is noteworthy to players in the machinery-breakdown-insurance field, but also to liability and indemnity Insurers.

The Plaintiff claimed the cost of repairing its cone crusher which became damaged as a result of the failure of the crusher’s main bearing from Insurers. The failure occurred during late October of 2007. Insurers refused indemnity under the Machinery Breakdown and Loss of Profit policy, raising a number of defences (certain of which fell away during the course of the trial). The most important remaining defence put up by Insurers was that the Plaintiff failed to preserve the damaged parts of the crusher and failed to make the parts available to it for inspection.

Kathree-Setiloane J considered first the following general condition of the policy:

“The due observance and fulfilment of the terms of this Policy … shall insofar as they relate to anything to be done or complied with by the insured be a condition precedent to any liability of the company [Insurers] to make any payment under this Policy.”

The particular term on which Insurers relied stipulated that:

“… on the happening of any event which may result in a claim under this Policy the insured shall as soon as possible and at its own expense … iii) preserve any damaged parts and make them available for inspection by a representative or surveyor of the company.” (hereinafter referred to as “the preservation condition”).

The Judge pointed out that the defence on which Insurers sought to rely was a ‘special defence’ founded on exceptions contained in the policy, and thus stood to be proved by Insurers. He considered the dictionary definitions of “preservation” (“preserving, being preserved, from injury or destruction”), “preserve” (“to keep safe”, “to keep safe from change or extinction” and “to protect from decay and damage”).

Insurers’ arguments

Insurers argued that the preservation condition was a condition precedent to a successful claim and that the Plaintiff had to comply with it, failing which Insurers were at liberty to deny liability under the policy.

Insurers also argued that the inclusion of a preservation clause in a policy of this nature was essential, as in its absence, Insurers would “be left to the mercy of the insured’s unilateral decision-making, leaving the insurers with no checks or balances” and that ‘strict observance’ was a condition precedent to liability on its part.

Plaintiff’s evidence

The Plaintiff led evidence by its own representatives as well as a number of experts.

Evidence made it clear that the Plaintiff started stripping the failed crusher shortly after the failure: parts were separated; some components were left in situ while others were freighted away to the Plaintiff’s workshop where certain parts were undressed further; some critical parts were even torch cut.

Expert evidence confirmed that the torch cutting may have caused the “killing of” evidence (not only of the parts which were cut, but also possibly the surrounding parts).

Under cross-examination, the Plaintiff’s representative conceded that these actions “killed evidence” but he attempted to soften this by offering that he had not intended to obscure or destroy evidence. He contended that he was simply driven by practical considerations and expediency when he instructed and oversaw the dismantling, hauling and cutting of the parts.

Insurers’ appointed loss adjuster apparently visited the site during November 2007 and his letter to the Plaintiff was accepted into record as an aid memoire or memorandum of sorts. The loss adjuster took some photographs of certain parts which were made available to him for inspection. It was contended by the Plaintiff that the loss adjuster failed to make a demand or request to see further evidence.

In response to these arguments, Kathree-Setiloane J observed that it was apparent from the evidence that the Plaintiff had become aware at a very early stage (mere days after the failure) of the “event which may result in a claim” and that the Plaintiff would have appreciated the ‘serious nature of the event’ almost immediately. It would thus have been apparent to the Plaintiff at such an early stage that an insurable event had occurred. The Plaintiff should have then complied with the obligation placed on it by the policy to preserve the failed component parts in order to make it available to Insurers.

The learned Judge observed further that the contractual obligation to preserve evidence is ‘absolute’ and that the test was thus not whether the Plaintiff’s failure to comply was intentional or negligent. The test was simply this: “was it preserved or not?” He agreed with Insurers’ contention that the Plaintiff’s failure to preserve the damaged parts was patent and fatal to the plaintiff’s claim and commented:

“What is absolutely certain at this time, is a complete and utter failure to preserve inter alia the damaged parts in the form of the component bearing. The bearing had for all intents and purposes been completely “destructed” by this stage in complete disregard of the plaintiff’s contractual and absolute obligations to preserve.”

The Judge commented on the mind-set of the Plaintiff as being apparent from its conduct and referred to the Plaintiff’s reliance of its broker’s advice to: “… carry on, do what you must as if you were uninsured …. “ The Plaintiff acknowledged to have interpreted the broker’s advice as “… do not waste time, do not wait, carry on because your income is standing, we will do whatever to get you going.”

The Court also commented pointedly that it was not for Insurers to demand to see the preserved damaged parts but for the Plaintiff to preserve same and “make them available” to Insurers for inspection.

Further expert evidence

By the time the Plaintiff’s experts became involved in the study of the occurrence, the failure to preserve and the consequences of such failure had become manifest and its consequences had been apparent.

One expert reported the he was only able to consider “the possible cause of failure having only inspected the inner ring, cage and two rollers” and he expressed grave misgivings on the fact that the cage had been cut at the point where the damage occurred, stating that the fact of the cutting made it “impossible to determine if there was a fracture, crack or distortion.” His report and his verbal evidence was littered with qualification and similar observations, concluding unsatisfactorily that on the sparse evidence available to him, he could merely conclude that the fracture of a cage pocket would usually be the sudden result of severe shock. His report made it clear that other possibilities could not be excluded.

One other expert reported plainly that the Plaintiff had killed evidence.

All the experts agreed that the only reliable mechanism for determining the cause of the failure with absolute certainty would be to examine the bearing as a full component.

The Court’s observations

Given the experts’ common view that there was a dire need to inspect a whole component, the learned Judge considered the practicality of preservation clauses as conditions precedent that place an ‘absolute obligation’ on the Plaintiff. He went on to say that preservation clauses were not merely inserted into policies so that Insurers would be allowed to avoid liability on vague and unreasonable technicalities. Preservation clauses, he stated, were essential for the proper assessment of the facts of a matter since such terms (that oblige a party to take on a positive duty) were designed to minimise the incidence of risk and to determine the extent of a loss.

The Judge referred, with approval, to similar clauses that have found application in our law –

First, the ‘timeous notice clauses’ which were found to be conditions precedent in Norris v Legal and General Assurance Society Limited : Watermeyer J in casu found (after considering various precedents) that a condition which imposes an obligation on an insured which was clearly intended to have some legal effect, in terms of which

“[t]he insured shall on the happening of any loss or damage to the property insured give immediate notice thereof in writing to the Company and shall at his own expense within 30 days after the happening of such loss or damage deliver to the Company a claim in writing with such detailed particulars and proofs as may be reasonably required …”

was indeed a condition precedent and the Plaintiff, having failed to comply with either of the conditions, was consequently not entitled to indemnity.

The Judge stated that Insurers would “obviously want to know immediately of the happening of a fire so that it could investigate the cause and effect thereof under the most favourable circumstances … Delay in notifying the Company … might well result in serious prejudice to the Company.”

Second, in Russel, N.O. and Loveday, N.O. v Collins Submarine Pipelines Africa (Pty) Ltd the Court found that a positive obligation in the form of assistance and co-operation was deemed to be a suspensive condition for the positive election by Insurers “to exercise their right to associate.”

Conclusion

Kathree-Setiloane J concluded that the uncontroverted evidence led on behalf of the Plaintiff (through its experts and representatives) equated to an admission that there had been a breach of its obligation to preserve. In law such a breach of an express term of the contract allowed Insurers to avoid liability and to reject the claim. It was found that Insurers had discharged its onus to prove on a balance of probabilities that the Plaintiff had failed to comply with its obligation and that Insurers were entitled to reject the Plaintiff’s claim.

The judgement is sound for many reasons. Where circumstances present an Insured with the opportunity to tamper with or destroy evidence, whether intentionally or not, it is crucial that Insurers are allowed reliance on a condition precedent to allow it a fair opportunity to investigate a claim.

Such conditions should be regarded as designed to ensure the preservation of evidence in order that Insurers may perform their own assessment but also to assist the Insured in the technical and commercial management of its plant and business.